Money Smart (ASIC)
During these uncertain times, you might be nervous about your investments. It’s important to consider your long-term goals and make well-informed decisions.
Here are some steps to take with your super or investments in shares to ride out ups and downs in the investment markets.
1. Avoid focusing on market volatility
When investment markets are volatile, it can be a good time to review your investment strategy. But don’t make any rash decisions based on recent market falls.
Some investors panic when markets fall and decide to convert all their investments to cash. However, this means you lock in your losses and you miss out on any investment market recovery. Markets typically recover over the long-term.
Diversification across a broad range of asset classes is the best defence to ride out the ups and downs in the markets at any time.
Super in an uncertain investment market
If you’re concerned about your super balance taking a hit, remember super is a long-term investment. Over time it will recover from the ups and downs in investment markets.
If you’re close (5 years or less) to retirement, understand your retirement income options, take your time and avoid hasty decisions.
Consider getting financial information and guidance from:
- a licensed financial adviser
- your super fund
- a Services Australia Financial Information Service officer
2. Don’t try to time the market
It’s not a good idea to sell shares or other investments based on daily headlines.
Even the most skilled and experienced investors have difficulty predicting the best time to buy and sell. You might sell your investments only for markets to recover soon after.
Holding onto your investments, even during downturns, can be an effective strategy if your financial goals and situation haven’t changed.
3. Review your financial goals
Unexpected events can impact your financial goals
Talk it over with your family, consider your long-term goals and only make well-informed decisions
If you’ve become unemployed, for example, you might need to cash out some of your investments for short-term expenses. Only do this if you have no savings to draw on and have explored all other options such government support and applying for financial hardship.
If you do have to draw on your investments, only cash out some of them, if you can. That way you can minimise your losses and still have some money invested when the market begins to recover
4. Beware of investment scams
Beware of cold-calls and unsolicited investment offers and the promise of big returns. If it sounds too good to be true, it usually is.
Making hasty decisions, like panic selling or buying shares, can make you more vulnerable to investment scams.
Scammers exploit fear with fake investment offers promising to recover your losses.
Disclosure Statement: ClearView Financial Advice Pty Ltd ABN 89 133 593 012 AFSL No. 331367 | Matrix Planning Solutions Limited ABN 45 087 470 200 AFSL & ACL No. 238256. Head Office: Level 14, 20 Bond St, Sydney NSW 2000 General Advice Warning: This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should read the Product Disclosure Statement (PDS) before making a decision about a product.
Want to learn more about investing but you’re not sure where to begin? Here are a few key terms every investor should know.
If you’re looking to build wealth for the future, buying a lottery ticket probably isn’t the way to go. A far more reliable option is to invest – but, unlike hitting the jackpot, investing takes time, patience and knowhow. For many of us though, trying to understand investment-speak is like learning another language. But don’t worry – once you get your head around a few basic concepts, you’ll be on your way towards becoming an educated investor. Here are a few common investment terms to get you started.
Your portfolio is the collection of assets you’ve invested in, which might include cash, bonds, shares and property. You may hold different amounts of each asset and they’re all likely to have different values. As an investor, you can manage your own portfolio and choose which assets to buy and sell at which time, or else you can hire a professional to manage it for you.
Cash refers to money you have that isn’t tied up in other assets. It’s often easily accessible when you need it, and it has a clear, specific value. As well as the hard cash you have on hand, it may also include other forms of money that can readily be converted into cash if you need it, such as the balance of your savings account.
Investing in a bond essentially means lending money to the government or a company for a period of time, at either a fixed or variable interest rate. Then, when the bond expires, you get your money back with interest. Bonds are generally considered to be a more secure investment than shares because you know exactly how much you’ll earn and when – but the main risk is if the issuer cannot pay you back.
A share or stock is a portion of a company that’s available for investors to purchase. The amount of a company each investor owns is relative to the total number of shares available; for example, if a company has 100 shares and you buy one, then you become a shareholder who owns 1% of the company. If the company returns a profit and pays income to its shareholders, your dividend is based on the portion you own. Because shares are subject to stock market movements, their value is likely to go up and down in value over the short term – but they also have the potential to earn higher returns than cash or bonds in the long run. This means they may carry higher risk than these other assets.
The most direct way to invest in property is to buy residential or commercial real estate and rent it out to a tenant. Your investment can then pay off in two ways: firstly, through the rental income, and secondly via an increased asset value if you sell it for a profit. You can also invest in property indirectly through an Australian Real Estate Investment Trust (A-REIT). These enable investors to pool their money together in a shared portfolio of commercial and industrial real estate.
When you invest in a managed fund, your money is pooled together with the money of other investors. A fund manager is responsible for all the fund’s investment decisions regarding buying and selling assets. The fund can pay a regular income, but the amount can increase or decrease depending on how the assets perform. The value of your managed fund investment (eg, units) can also fluctuate over time. Although investing in a managed fund gives you less control than direct shares, it may also give you access to a wider range of investment opportunities than you’d have as a sole investor.
When deciding which investments are right for you, it’s important to understand the trade-off between risk and return, and know how to manage investment risk. All investments carry some risk due to factors such as inflation, an economic downturn or a drop in a particular market – even if you choose an investment that’s traditionally considered ‘safe’, such as high-quality bonds. Every investment carries the risk of not returning your investment, and assets with greater changes in their capital value and pricing will move around a lot more, especially in the short term. It’s therefore essential to know and understand the risks of every investment you make.
Asset allocation refers to the mix and value of the various assets and asset classes in your portfolio. The key to getting the right mix is to weigh up your goals, your appetite for risk and the length of time you’re planning to invest – which is different for everyone. Each asset class carries its own level of risk and return: generally speaking, ‘conservative’ assets like cash or bonds offer a safer but lower return than the potential returns on ‘growth’ assets like shares or property.
Diversification is a strategy for reducing risk in your portfolio by investing in a range of assets, with some likely to perform better than others at different times. That way, when one type of investment is underperforming, your other investments will likely still be earning returns. For example, let’s say you’re only invested in shares. If there’s a downturn in the stockmarket, your entire portfolio will be negatively impacted. But if half of your portfolio is invested in other assets, then that half may not be affected.
Return on investment
Your return on investment (ROI) is the amount you earn from an investment relative to how much it cost you. By applying this simple formula, you can compare the profitability of different investments:
ROI = (Gain from Investment – Cost of Investment) divided by Cost of Investment
For instance, if you buy a house for $500,000, earn $25,000 in rental income, and then sell the property for $600,000 – after accounting for $60,000 in total costs (stamp duties, loan interest, legal and agents fees, rates and maintenance etc.) your ROI would be $65,000 divided by the $560,000 spent, which equals an ROI just shy of 12%.
A capital gain is the profit you make when you sell an asset – or the increase in value between what you originally paid and how much the asset sells for. If you sell an asset for less than you bought it, this is called a capital loss. Because your net capital gain forms part of your taxable income, you generally need to report any net capital gain or loss in your tax return for that year. This is the difference between the total capital gain for the year and the total capital loss (including unused loss from previous years), less any relevant CGT discount or concessions.
The yield is the amount of income you receive from an investment, for example, interest, dividends, or rent. They’re usually calculated as an annual percentage based on the cost or value of the asset, and can vary depending on how the market and asset is performing or is expected to perform. But remember, a yield isn’t a guarantee of specific returns. It’s simply an indicator of how a particular investment is currently performing or is likely to perform in the near future.
Need more guidance?
While it’s good to understand the basics, it’s important to realise just how complex investment concepts really are. So if you’re new to investing – or even if you’re a seasoned investor – be sure to talk to your financial adviser to make sure your investments are in line with your lifestyle needs and goals.
This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 10 January 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.
When you’re exploring aged care options for a loved one, the process can seem overwhelming. Here’s how to make it a bit easier.
Choosing when to place an elderly relative into a retirement home may be one of the toughest decisions you have to make. And while you want your loved one to be as comfortable as possible in their final years, it’s also important to be financially prepared.
With so many choices available and so many decisions to make, it helps to break down the process into a series of steps. And remember, when the time comes to begin your own aged care journey, you’ll want to be ready – so the sooner you start planning, the better.
Step 1. Finding the right place
The first step is to have your loved one’s needs assessed to determine the right level of care – from semi-independent living to round-the-clock nursing. Free assessments are conducted by community- or hospital-based Aged Care Assessment Teams. You should also consider any additional services your
relative might need in the future, so they won’t have to move again if their health declines.
If you can, visit different retirement facilities together to find an environment your loved one feels comfortable in. Be sure to investigate the social activities and meal options on offer, to ensure they’ll enjoy a happy and enriched life there.
Step 2. Calculating the costs
Although the federal government subsidises aged care costs, there are still various expenses that need be covered. For residential aged care, these include:
Accommodation fees. Prices are set by the facility but may also depend on your relative’s income and assets. Fees can be paid either as a lump sum or in regular instalments.
Basic daily care fee. This covers daily living costs and is fixed at 85% of the maximum single Age Pension – currently $50.66 per day.
Means-tested fee. This may be charged on top of your relative’s daily care fees, and is based on their assets and income. It’s currently capped at $27,232.33 a year.
Extra service fees. Additional fees may be charged for a more comfortable standard of accommodation, or special services like hairdressing or pay TV.
A financial adviser can help you calculate all these costs so you know exactly what to expect.
Step 3. Managing the paperwork
Because the fee amounts vary, you’ll need to lodge a Request for a combined assets and income assessment form with the Department of Human Services. This helps determine how much of a government subsidy your relative will receive towards the aged care costs.
Next, you can start applying directly to aged care facilities to find a suitable placement for your relative. A facility will contact you as soon as a slot becomes available, and they may also require you to enter into a Resident Agreement and Accommodation Agreement.
Step 4. What to do with the family home
Moving into aged care accommodation isn’t cheap, and many people who go into care need to sell their family home to cover the costs. This process can take many months, so you might also have to sort out a loan to manage the initial expenses while the property is on the market.
An alternative may be to rent out the property and use the rental income to help cover your aged care fees.
Your relative’s choice of whether to sell, or keep and rent out their former family home can have significant consequences for the aged care fees they pay, as well as any social security entitlements they receive, so speak to a financial adviser about the best option before taking any action.
Step 5. Making the move
Packing up an entire house or flat and moving into a single room of a retirement home requires a lot of work. As space will be limited, you’ll need to prioritise the most important or valuable items (including those with sentimental value) for your relative to take with them, and then sell or give away the rest.
There will also be other practicalities to deal with, such as changing their postal address and advising Centrelink about the move. Finally, make sure you include your loved one in as much of the decision-making as possible, to help make the transition as painless for them as you can.
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 20 September 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted. by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
Stephen Halmarick, Chief Economist at Colonial First State Global Asset Management, shares his insights on the US Presidential election outcome, and what this means for financial markets.
For the second time in 2016, the global geopolitical landscape has shifted dramatically (and traditional opinion polling has been shown to be severely lacking) with the election of Donald Trump as the 45th President of the United States. The win for Donald Trump and the Republican Party has come as a great surprise to the consensus in the US and, evidently, to the majority of financial market participants given the initial reaction in markets yesterday – with a significant ‘risk off’ move before a recovery in US trading. As stated previously (see Blog 6, the Travelling Economist in Japan and the US), we had based our economic, policy and market forecasts on a Clinton victory and so we will need to update our thoughts – although we provide some initial views below. The victory by Donald Trump looks to have been much more comfortable than almost any commentator was expecting – and indeed the election has seen a much stronger vote for the Republican Party than even the Republican Party itself expected.
Importantly, Donald Trump won a majority of the Electoral College votes. With a majority of 270 College votes required, Donald Trump has won 279 (as at approximately 7am Sydney time) and is likely to win the last two states, Michigan and Arizona and their 16 and 11 Electoral College votes respectively, to finish with 306. His unexpected victory has been achieved by flipping several blue states that had previously voted for Obama in 2012, including Pennsylvania, Ohio, Michigan, Wisconsin, Iowa and Florida. While Trump was expected to do well in the rust belt and former manufacturing heartland, this outcome is far beyond what anyone expected.
In addition to the victory by Donald Trump, the Republican Party has retained a majority in both the Senate and House of Representatives. The Senate and House results are still being finalised but at this stage, it looks like the Republican Party is likely to have a 52/48 majority in the Senate (down from 54/46) and a 239/196 majority in the House of Representatives (down from 247/188).
Words being used to describe the result are ‘tectonic’, ‘revolutionary’ and a significant vote against the political status quo. The implications are likely to be far reaching – in both a political and economic sense.
Secretary Clinton’s relatively early concession to President-elect Trump and calls from her and President Obama for unity and support for him suggest there is recognition that, much like ‘Brexit’, the biggest challenge to come will be knitting the country back together after such a toxic and divisive campaign. Indeed, Trump’s victory speech was much more conciliatory than many expected given the tone of his campaign, with him even offering thanks to Clinton for her “service to our country”.
As we noted in our previous US Election blog (2 November 2016), Donald Trump’s policy priorities are expected to be:
Tax reform: including a substantial reduction in both income tax (down to three basic rates, 12%, 25% and 33%) and cuts in the company tax rate to around 20%-25% (from 35% currently).
Healthcare reform: Repealing Obamacare with a focus on reducing costs and entitlements.
Defence: Increased spending on both Defence ($US450bn) and Veteran’s programs ($US500bn).
Trade policy: A much more aggressive trade policy, including naming China as a currency manipulator and imposing tariffs on selected Chinese imports, changing the terms and conditions and NAFTA and abandoning the Trans Pacific Partnership (TPP). We would note, however, that there is considerable uncertainty of whether Trump as President could act unilaterally on trade policy, or whether he would need the support of Congress (which may not be forthcoming) to change policy, especially treaties such as NAFTA.
Immigration reforms: Reduce the flow of both legal and undocumented immigrants, including some deportation efforts and much tougher rhetoric.
Infrastructure: An infrastructure spending program of approx. $US300bn over coming years.
Other: Housing finance reforms, loosening M&A regulations, loosening media ownership and liberalizing energy drilling requirements, reversal of some climate change policies.
Implications of President Trump policies
It is our view that, over time, Donald Trump’s policies would, as announced, be highly stimulatory, expansionary and, ultimately, inflationary.
In terms of implications for financial markets we see three phases for the period ahead – but with less confidence on the exact timing of these trends.
- The initial market reaction, globally, was ‘risk off’. Global equities were down, the USD was down against other major currencies and US Treasury bond yields were down. This is a very similar reaction to that seen after the ‘Brexit’ vote.
At one stage in the US (late afternoon on 9th November AEST), the S&P and NASDAQ Futures were down 5%, the maximum drop permitted by the Chicago Mercantile Exchange before trading curbs are triggered. Globally, the Japanese Nikkei closed down -5.4%, Hong Kong’s Hang Seng 2.2% and the ASX200 down 1.9%.
However, once US markets opened, the ‘risk off’ sentiment quickly reversed with most equity markets closing higher, UK FTSE100 closed up 1% while the Euro Stoxx 50 index was up 1.1% and in the US the S&P 500 is currently trading around +1.1% while the Dow Jones is 1.4% higher.
In bond markets, much like equity markets, we saw the initial ‘risk off’ sentiment quickly reverse as US markets opened and yields rose sharply on the result, with US 10yr yields up 20bps to 2.07%. Initially Australian 10yr bonds were down 14bp to 2.21%, but in overnight futures trading yields have increased 29bps to 2.49%. In currency markets, the USD initially weakened with the DXY index at one stage down 2.1% before recovering through US trading to be up 0.76% on the day. The Mexican Peso is down 7% against the USD, which has been seen as a proxy for a Trump win given his rhetoric around Mexico.
The USD finished stronger against most currencies, with the US up against the Yen (+0.72% to 105.8) and Euro (+0.75% to 0.914) but down against the Pound Sterling (-0.38% to 0.804). The AUD is weaker by 1.1% against the USD at $US0.765.
The ‘risk off’ mode was based on the view that Donald Trump is a vote for significant change in the US political system. This change will likely bring uncertainty and, as we know, markets do not like uncertainty. However it is fair to say that phase one has been shorter than expected.
- The second phase of the market reaction, which appears to have begun sooner than we anticipated, is likely to be ‘risk on’, with positive sentiment towards equities and weakness in bonds. This is based on the view, as already mentioned, that Donald Trump’s policies are very stimulatory, expansionary and inflationary.
If he was able to get is election policies through Congress (which could be more likely given the Republican’s majority in both the House and Senate), we are likely to see a near-term acceleration in the pace of growth of the US economy and a surge higher in the USD.
The equity markets could potentially respond positively to this stimulus – especially those with significant cash holdings off-shore and those companies involved in sectors of the US domestic economy that stand to benefit from Trump’s nationalistic policy focus.
- Phase three of response to President Trump’s policies are, not likely to be as supportive. The key issue here, in our view, is that the inflationary implications of Trump’s policies are likely to see the Federal Reserve raise interest rates much more aggressively than currently priced into markets as inflation takes hold.
This could be expected to see Treasury bond yields move sharply higher – short-circuiting the stronger economic data. Trumps anti-trade policies and commitment to increasing tariffs are also likely to be inflationary and negatives for growth. The implication here is that, perhaps within a year or so of President Trump’s policies being introduced, the US economy could weaken significantly (possibly head towards recession), with the USD, bond yields and the equity markets all likely to decline as well.
- Australia: The Reserve Bank of Australia (RBA) Board meet on 1 November 2016, as widely expected, the cash rate was held unchanged at 1.5%.
- The statement remained largely similar to the October statement, with inflation still described as “quite low” and “…expected to remain low for some time.”
- The RBA did however, tilt slightly dovish on the commentary around the labour market, noting that “employment growth overall has slowed”. This was slightly tempered by the observation that “forward-looking indicators point to continued expansion in employment in the near term.”
- The statement also suggests little chance of changes to the forecast in the Statement on Monetary Policy, due Friday – “The Bank’s forecasts for output growth and inflation are little changed from those of three months ago.”
- Policy guidance was left unchanged from October – “the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”
- Q3 16 Consumer Price Inflation (CPI) data was released and was slightly above consensus estimates. Headline CPI rose 0.7%/qtr and 1.3%/yr, from 1.0%/yr in Q2. Key drivers included increases in fruit (+19.5%/qtr), vegetables (+5.9%/qtr) and electricity (+5.4/qtr) prices, this was partly offset by falls in telecommunication equipment and services (-2.5%/qtr) and fuel (-2.9%.qtr).
- Underlying inflation, the RBA’s preferred measure rose to 0.4%/qtr, slightly down from 0.5%/qtr in Q2 16. The annualised rate fell slightly to 1.5%/yr from 1.6%/yr. Both measures of inflation are still below the RBA’s 2-3% target band
- The September labour market report showed the unemployment rate decreased by 0.1% to 5.6%, driven by a 0.2% fall in the participation rate to 64.5%. The number of people employed fell by 9.8k below the +15k expected. The decrease was entirely driven by full time employment (-53k) while part time employment rose (+46k), continuing the recent trend towards flexible and part-time employment.
- Consumer confidence increased over the month with the index up 1.1%/mth to 102.4. The largest gains were seen in the Economy 1 year ahead (+5.8%) and consumer sentiment (+1.1%) components.
- US: The US Federal Open Market Committee (FOMC) meet on 1-2 November 2016 and as widely expected left the official Fed Funds target rate unchanged at 0.25%-0.5%. While the November meeting was never considered “live” given its proximity to the US Presidential Election, markets and ourselves continue to expect a rate increase at the 13-14 December FOMC meeting.
- In detailing the policy decision, the Fed statement was little changed from that released at the time of the September FOMC – with the Fed continuing to signal that a rate hike at the 14 December FOMC is the base case.
- The Fed’s statement repeated the view that “near-term risks to the economic outlook appear roughly balanced” and that they will continue “to closely monitor inflation indicators and global economic and financial developments”. Given this, the Fed noted that “the Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being to wait for some further evidence of continued progress towards its objectives.”
- On inflation the Fed upgraded their commentary a little, stating that inflation “has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports” and that “market-based measures of inflation compensation have moved up but remain low.”
- The first estimate of Q3 16 GDP was released at 2.9% on a seasonally-adjusted-annualised-rate, better than the 2.6% expected and an improvement on 1.4% in Q2 16. The better than expected print was helped by a recovery in net exports and an increase in soy bean exports (US$38bn annualised rate) which contributed 0.9% to the headline figure.
- Growth in Q3 saw a slowing in domestic demand with consumption (+2.1%, down from 2.7% in Q2), business capital spending (+1.1%) and government spending (+0.5%) all weak or slowing.
- Employment was slightly weaker than expected in September increasing by 156K, but still more than enough to cover the estimated natural increase in the labour force (~90k). Despite this, the unemployment rate increased to 5.0%, from 4.9% driven by a 0.1% increase in the participation rate to 62.9%. This increase in the participation rate suggests that there is still some excess slack in the labour market which may not be picked up by the unemployment rate and should encourage the Fed to run the economy a little hotter.
- Average hourly earnings data for September was weaker than expected at 0.2%/mth, the annual rate increased to 2.6%/yr from 2.4%/yr in August.
- Inflation as picked up slightly. Headline CPI was up 0.3%/mth in September with the annual rate increasing to 1.5%/yr. Core CPI increased 0.1%/mth with the annual rate falling 0.1% to 2.2%/yr. Inflation continues to be driven by shelter and medical costs, with energy (+2.9%/mth) also contributing to the increase in headline CPI.
- The Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, was stable at 1.7%/yr in September, around the level is has remained for most of 2016.
- Europe: The European Central Bank (ECB) meet on 20 October 2016 and left monetary policy unchanged, as largely expected.
- ECB president Draghi dampened expectations that asset purchases would be tapered and reiterated the forward guidance that QE would continue at the monthly pace of EUR80bn until there was a sustained increase in the path of inflation consistent with the ECB’s objective.
- The market is expecting an extension of the ECB’s QE program which is due to end in March 2017 at the December meeting.
- The first estimates of CPI for the euro area in October showed an increase of 0.5%/yr, the fastest since 2014. Core CPI was stable at 0.8%/yr still well below the ECB’s 2% target. Inflation was aided by the increase in oil prices over the last year with energy prices down -0.9%/yr in October compared to -3%/yr in September. Services remain the main driver of inflation at +1.1%/yr.
- The political deadlock in Spain ended over the month with Mariano Rajoy of the centre right Peoples Party sworn in a PM after winning a confidence vote, ending a 10 month period with no government.
- UK: The Bank of England (BoE) Monetary Policy Committee (MPC) did not meet in October, the next meeting is scheduled for 3 November 2016.
- Over the month it was confirmed that the BoE governor Mark Carney would leave his role in 2019, before the end of the full 8 year term (2021), but long enough to see the UK through the Brexit. The decision appears to be due to personal/family reasons and not political pressure as speculated.
- Q3 2016 GDP was better than expected increasing by 0.5%/qtr with no sign yet of a “Brexit” slowdown. The annual rate increased to 2.3%/yr. Growth was entirely driven by service (+0.8%/qtr), while industrial production (-0.4%/qtr) and construction (-1.4%/qtr) slowed.
- CPI data showed inflation increased by 0.2% in September, driven in part by rising oil and core goods inflation. The annual rate of inflation increased to 1.0%/yr from 0.6%/yr while core inflation increased to 1.5%/yr from 1.3%/yr. Rising oil prices and a lower currency are expected to continue driving inflation higher over the next year.
- NZ: The Reserve Bank of New Zealand (RBNZ) did not meet over October, the next meetings will be 10 November 2016.
- Q3 16 CPI was stronger than expected at 0.2%/qtr and 0.2%/yr, down from 0.4%/yr in Q2 16 and still well below the RBNZ’s target of 1-3% on average over the medium term.
- Canada: The Bank of Canada (BoC) left rates unchaged at 0.5% at their 20 October 2016 meeting.
- September CPI increased by 0.1%/mth while the annual rate rose to 1.3%/yr from 1.1%/yr. Core inflation was stable at 1.8%/yr.
- Japan: The Bank of Japan’s (BoJ) meet on 1 November 2016 and left monetary policy unchanged as widely expected.
- China: The People’s Bank of China (PBoC) left monetary policy unchanged during the month with no rate cuts or reserve requirement ratio easing.
- Q3 16 GDP released in October showed growth once again stable at 6.7%/yr, the middle of the 6.5%-7% target band where it has remained for all of 2016.
- Inflation increased in September for the first time since February, rising to 1.9%/yr from 1.3%/yr in August. Food price inflation continues to be the major driver of inflation, rising to 3.2%/yr in September from 1.3%/yr in August.
- Chinese producer prices as measured by the PPI increase 0.1%/yr in September, the first increase since 2012 and up from -5.9%/yr one year ago.
- The Australian dollar strengthened against most major currencies over October. The AUD was down 0.7% against the USD to $US0.7608, but rose against the euro (+1.85%), the sterling (+5.42%), yen (+2.90%) and NZ dollar (+1.18%),
- Improving commodity prices and terms of trade over the month supported the currency.
- Commodity prices were mixed over October with metals varied and weakness in energy, except coal which saw significant increases.
- The price of West Texas Intermediate Crude finished the month at $US46.86/bbl, down 2.9%, while the price of Brent was down 4.2% to $US48.61/bbl. Oil prices rose early in the month, around optimism that a potential OPEC deal would reduce excess supply. Before falling in the last week of October as the market realised any production cuts would be difficult to achieve and would likely exclude key OPEC producers (Iran, Iraq, Nigeria and Libya).
- Increasing activity in the US energy sector also weighed on markets with US rig counts now up nearly 40% from the lows reached in May this year.
- Gas prices were mixed with the US Henry Hub spot price down 7.9% to $US2.79/MMBtu while the UK natural gas price was up 18.5% over August.
- Iron ore prices were stronger over October, up 15.3% to $64.38/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China, the highest level is May 2015.
- Coal was the best performing commodity over the month with increasing demand from China, due to domestic mine closures, pushing prices higher. The price of Newcastle thermal coal increased 50.4% to $108.6/metric tonne over the month.
- Zinc (+3.4%) and Aluminium (+3.6%) rose over October while Nickel (-0.9%), Lead (-2.8%), Gold (-3.3%) and Copper (-0.2%) were all weaker.
- The ASX/S&P 200 Accumulation Index lost 2.2% during October, with most industry sectors finishing the month lower. Health Care (-8.3%) was among the worst performers, dragged lower by industry heavyweight CSL.
- Bond proxy sectors continued September’s decline, as the market reacted to rising bond yields and a potential rise in US interest rates. AREITs (-7.9%) and Utilities (-3.0%) once again underperformed the broader market.
- Energy (-2.3%) started the month strongly, but finished lower as doubts surfaced around OPEC’s commitment to cut production. Whitehaven Coal had another strong month on the back of rising coal prices, adding to the 333% share price appreciation since the start of 2016.
- Materials (1.3%) outperformed the market with strong performances from Fortescue Metals and Rio Tinto, which benefitted from a strengthening iron ore price.
- Financials (0.7%) edged higher, led by banks as sentiment towards the sector improved. Banking stocks typically enjoy investor interest during October, as three of the big four banks go ex-dividend in the first half of November.
- The S&P ASX 200 A-REIT index continued its recent decline, falling by -7.9% in October. Higher bond yields dampened sentiment towards REITs and other income-oriented investments.
- Office A-REITs held up relatively well on the view that robust leasing demand from the financial services, legal and technology sectors would support Sydney and Melbourne’s office markets.
- The best performing A-REITs were Charter Hall Retail REIT (-1.9%), which stabilised following steep declines in August; and Dexus Property Group (-2.3%), which held an investor day and provided a first quarter update.
- The worst performing A-REITs were Iron Mountain (-12.1%) and Scentre Group (-10.4%). Although neither company announced material news, broader sector underperformance weighed on both stocks.
- Listed property markets offshore also dipped in October. The FTSE EPRA/NAREIT Developed Index (TR) fell by -5.7% in US dollar terms. Despite ending the month lower, Hong Kong (-1.3%) was the best performing region for a third consecutive month, followed by Japan (-1.4%). Property securities in Continental Europe and the UK lagged.
Global developed market equities
- Global equity markets were mixed over October with weakness in the US and strength in Japan and European peripheries. Volatility continued over the month as markets reacted to changes in the oil price, political concerns in the US and the prospect of a Fed rate hike in December.
- The MSCI World Index was down 2.0% in US dollar terms in the month of October and -1.3% in Australian dollar terms.
- In the US, the S&P500 (-1.9%), the Dow Jones (-0.9%) and the NASDAQ (-2.3%) were all weaker, driven by broad market weakness. While earnings largely beat (reduced) expectations, the results were more “less bad” than good.
- US markets also stumbled at the end of the month as it was revealed the FBI had found more Clinton emails in a separate investigation.
- On a sector basis, MSCI Financials (+2.13%) was the best performer, as bank stocks climbed with rising yields. MSCI Health Care (-6.94%) was the worst performer as political noise around drug pricing and earnings concerns of medical device companies carried over to the rest of the sector.
- Equity markets in Europe were stronger over the month. The large cap Stoxx 50 Index rose 1.8% driven by strong performance in the periphery, with Greece (+4.5%), Italy (+4.4%) and Spain (+4.1%) all stronger. Elsewhere the UK FTSE100 (+0.8%), France (+1.4%) and the German DAX (+1.5%) all rose.
- Asia markets were mixed with the Japanese Nikkei 225 (+5.9%) and Taiwan (+1.3%) up while Singapore (-1.9%) and Honk Kong’s Hang Seng (-1.6%) fell.
Global emerging markets
- Emerging market equities were almost flat over October in USD terms with the MSCI Emerging Market Index up 0.2%, outperforming DM equities.
- Despite the 3% rally in USD index and higher US yields emerging markets performed well in local currency terms aided by the pick-up in key commodity prices.
- MSCI EM Latin America was the best performing region over the month rising 9.72% in USD terms with a strong rebound in Brazil (+11.2%) driven by positive political developments
- MSCI EM Europe, Middle East and Africa (-0.28%) and MSCI EM Asia (-1.54%) underperformed.
- The Shanghai Composite Index was stronger, up 3.2% on stable Chinese growth and stronger domestic consumption.
Global and Australian developed market fixed interest
- The month of October saw a global move higher in bond yields, on the back the growing consensus that global monetary policy may be reaching the end of its effectiveness. The market’s focus has subsequently shifted towards the time when stimulus may begin to be reduced from current levels, even though central banks have not announced any such plans at this stage.
- Key contributors to bond market moves over the month included the expected Fed rate hike in December, uncertainty over Brext (which drove weaker UK bond prices) and the movements in the oil price.
- The Australian bond market followed the lead from offshore, with yields rising strongly over the month. However, domestic influences were also a driver of this move, as evidenced by the larger move in Australian yields over their US equivalents. In particular, the new RBA Governor Phil Lowe’s emphasis on the flexibility of the central bank when looking at inflation suggested that further rate cuts are now less likely even if the inflation outlook is lower than forecast.
- The biggest moves in 10-year yields were in the UK (+50 bps) and Australia (+44 bps) with Germany (+28 bps) and the US (+23 bps) still posting solid rises. Japanese 10-year yields rose a smaller 4 bps reflecting the cap at 0% that the Bank of Japan implemented as part of its yield-curve focussed monetary policy strategy.
- Despite the notable sell-off in government bond yields, credit spreads moved little in the month. Demand for spread product remains favourable buoyed by accommodative global monetary policy and low issuance. Geopolitical events risk and uncertainty over the growth outlook are keeping spreads range bound as supply is subdued as companies are hesitant to invest (and hence issue debt to fund investment). As with government bond markets, credit markets are likely to see increased volatility in the run-up to Election Day in the US. Despite continued oscillations in oil prices credit spreads largely moved sideways with a small tightening in both physical and synthetic credit indices.
- Specifically the Barclays Global Aggregate Corporate Index average spread moved 6 bps tighter to 1.28%. The US and European spreads also moved 6 bps narrower with the Barclays US Aggregate Corporate Index average spread down to 1.25% and the Barclays European Aggregate Corporate Index to 1.09%.
- At the end of the month ratings agency S&P put a number of non-major bank Australian lenders on negative outlook, on the back of concerns the overinflated property market may give way for a sizeable correction. This follows the major banks and Australia’s sovereign ratings outlook both being moved to negative earlier in the year.
- Following notable tightening in Australian credit spreads last month, there was little movement intra-month in the average spread (relative to bond) of the Bloomberg AusBond Credit Index. This series closed as it opened at +107 bps. Issuance in Australian credit was subdued, although there was some longer-dated non-financial corporates which were readily absorbed by the market.